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When does it make sense to refinance? |
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The answer lies in what it can achieve for the borrower. Depending on the borrower's circumstances, good reasons could include lowering the interest rate, lowering the monthly payments, reducing the term of the loan (e.g., from 30 to 15 years), and pulling out cash to pay off high, non deductible consumer debt such as credit cards.
The bottom line is to look at the total picture of refinancing. How can this be done? The borrower can ask the lender to prepare an analysis in order to evaluate the options. The homeowner should also answer the following eight questions before refinancing:
- How long will the homeowner keep the property? (If the period is not long enough to recoup the costs of refinancing, the homeowner should not refinance.)
- What types of situations are anticipated in the homeowner's personal and economic future? (Will equity be needed in three years to send a child to college or pay possible expenses for personal health care or nursing home care for an elderly relative?)
- Will cash pulled out now be used for a sound reason that makes economic sense (such as adding a second bath in lieu of moving to a more expensive home?)
- What are the benefits in keeping the existing loan on the property (such as easy loan assumability or flexibility by adding seller financing if the property is sold)? Do they outweigh the tradeoffs?
- Would a new loan require additional costs of PMI or impound accounts for taxes and insurance that weren't previously required?
- How does the proposed loan compare to others based on interest rate, points, closing costs, and fluff fees (unregulated extra fees for services like tax checking, courier service, and so on)? In the previous refinancing example, the Russell's high loan fees were a big part of their problem.
- How would a lower interest rate affect the homeowner's tax picture?
- If the homeowner wants cash out, which is better for his or her situation: a new refinanced loan or an equity line of credit?
The reality is that a home (and its equity) are, for most people, their largest personal asset and savings account. The homeowner should make changes with the right loan, the right lender, and for the right reasons.
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When should I refinance?
The question of when to refinance a mortgage loan is one of the most commonly asked questions, but unfortunately there is not one answer that will be right for everyone. Deciding when a home mortgage refinance loan makes sense, and when it does not make sense, is not as easy as it may seem at first blush.
That is because there are a number of factors that go into the home loan mortgage refinance loan decision. While the most critical factor is generally the mortgage interest rate you can get, it is by no means the only factor you must consider. It is also important to take into consideration such things as the length of the mortgage loan, the points charged by the lender, the origination fees and other fees for the mortgage, and many other fees and expenses as well.
Therefore, just getting a lower interest rate on a refinance mortgage loan is not always enough. This, of course, depends a great deal on the interest rate differential between the existing home mortgage and the mortgage refinance loan. Obviously, if your existing mortgage is 10% and you can now get a 5% mortgage loan, the decision is pretty simple.
However, if your current mortgage is 6% and the new home mortgage refinance loan is 5%, the decision becomes a bit trickier. In such a case, it is important to review the potential savings, and compare them carefully with the known costs of the loan to make a smart decision.
One of the best ways to make this important decision is to use a special tool known as a mortgage refinance calculator. These special financial calculators can be found in a number of places, including your local banker or other mortgage lender, and of course on the Internet as well. The complexity of these mortgage refinancing calculators varies quite a bit, but they are generally easy to use.
If you use a do it yourself mortgage refinance calculator, you may need to make some educated guesses when it comes to some of the items in the calculator. For instance, unless you have a home mortgage refinance loan offer in hand already, you may have to make some assumptions when it comes to points, fees and other expenses. This means that, although you can use a do it yourself calculator for basic research, you will probably want to rerun the numbers with a lender before making your final decision.
It is not easy to answer the question of when to refinance a mortgage loan, but in general, taking out a new home loan or mortgage refinance loan makes sense when current interest rates are 2% or more below your current mortgage interest rate. Generally, a 2% or more differential in interest rates will make all but the highest fee refinancing deals pay off for the homeowner.
Refinancing a mortgage loan is a great way to reduce your biggest monthly outlay. For most people, the mortgage payment is the largest single monthly expenditure, so lowering it even a few hundred dollars can have a huge impact on your overall financial health, and it can help you build equity in your home and take care of your future.
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